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Climate Change: The Heat Is On

From reporting to trading, utilities try to meet new expectations.
Fortnightly Magazine - January 2004

among the activist ranks, there is increasing evidence that it is taking hold among conventional institutional investors. In a number of instances, Institutional Shareholder Services (ISS), the nation's largest advisory service for institutional and corporate investors, has issued recommendations that institutional shareholders vote in favor of these resolutions. In 2003, ISS recommended in favor of climate-change resolutions aimed at American Electric Power, ChevronTexaco, Exxon Mobil Corp., General Electric, Southern Co., and TXU. In the case of one of these ISS-endorsed resolutions, the concluded that the extent of shareholder and ISS support "suggested that mainstream institutional investors, and not just an environmentally focused fringe, voted for it."

A letter sent in November 2003 by a group of institutional shareholders to the 500 largest companies in the world (by market capitalization) shows more evidence of the growing interest of the traditional finance community in this issue. The letter requests that these companies release "investment-relevant" information about their GHG emissions. The group of institutional shareholders sending the letter has assets of more than $9 trillion under management and includes such firms as Merrill Lynch Investment Managers.

Another sign that concern about corporate climate policies is moving from the bumper-sticker crowd to the pinstripe-suit crowd is the increased scrutiny from the insurance industry. An official from a leading provider of directors-and-officers liability insurance, Swiss Re, told the that the company is surveying its corporate customers to assess their climate-change planning. Christopher Walker, a U.S.-based managing director for Swiss Re, explained that the company is considering withdrawing policies for companies it deems inadequately prepared for future regulation. Walker claims that companies that fail to prepare for climate regulation may expose themselves to later lawsuits by shareholders.

Implicit in this activity by the more traditional financial community is concern about a bottom-line issue-namely, the extent to which utilities are positioning themselves to deal with the economic impact of future regulation. The possibility of future greenhouse gas controls casts a long shadow over utility balance sheets, particularly because power plants are capital-intensive and have long life spans. For utilities and their investors, the possibility of future carbon constraints has critical implications for decisions about retrofitting older coal-fired power plants, for example. In addition, possible carbon constraints could substantially affect the future value of new plants investors are considering today.

Are Lawsuits Next?

According to a July 2003 article in the , a number of lawyers have their sights set on emitters-not merely for poor investment planning, but also for the damages from climate change itself. A tough-talking new international group, the Climate Justice Programme, is threatening to bring tort class actions against companies and asserts that "the potential compensation for climate change impacts would make the tobacco payouts look like peanuts."

As a matter of law, suits pinning responsibility for climate-related damage on individual emitters would face numerous obstacles. Establishing causal links between particular entities and particular impacts, apportioning responsibility, and determining who should be compensated and by how much-all would be significant challenges for tort or nuisance-based climate litigation.

Still, even weakly substantiated lawsuits could have an impact